Sucheta Dalal :The Real Y2K Bug
Sucheta Dalal

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The Real Y2K Bug  

October 8, 1999

The week has ended with a smart rally of over 112 points in the Bombay Stock Exchange Sensitive index. And then on Diwali, during the moorat mock trading, the Sensex 'gained' another 52 points. Traders have long forgotten the despair of Monday when all the fancied scrips had hit the lower circuit barrier and investors worried about a meltdown.

Earlier in the week, Indian insurance institutions, the Unit Trust of India and some foreign funds are credited with shoring up prices by making huge purchases. I wonder how many were motivated by the need to keep their Net Asset Value up; after all, their bonuses are still to be worked out. The result is that the Sensex has recovered and investors are going through their Diwali with their good cheer and bullishness intact.

Since the volatile market makes little sense, let us turn our attention to issues that should. A few days ago the Securities and Exchange Board of India reacted to our column and scrapped the Foreign Institutional Investor registration it had granted to the Prudential Insurance Company of America on October 5. The registration was subject to the Reserve Bank of India's approval.

Prudential Insurance, the largest insurer in the United States, had been indicted by US investigators for deliberately cheating its customers for more than a decade, leading to an unjust enrichment of over $ 1 billion. It was charged with having 'trained its agents to mislead, misrepresent and defraud policyholders' by persuading them to swap existing investments and policies for new ones which promised higher returns.

After a long legal battle, Prudential Insurance agreed to pay $ 35 million as a fine for misleading policyholders and to return at least $ 410 million as unlawful money collected from them. It was also convicted for destruction of documents and fined $ 1 million.

The point about repeating this story is to show how simple it is for big foreign companies to get past the scrutiny process and gain access to the Indian markets. Our presumption always is that foreign companies operating in better-regulated markets are ethical and transparent and eligible to do business in India. Prudential Insurance will, by no means, be the last company with a dubious track record to make it past our scrutiny system.

The bigger fear is that such companies armed with high-powered public relations machinery would put itself beyond criticism and make honest appraisal impossible. Battling the image of foreign companies will probably be as tricky for Indian consumers as the slow and impossible dispute resolution machinery.

Let's look at another example of how the image business works even in the UK. Standard Chartered Bank published an apology last month to two Indians -- Suresh and Navin Shah, owners of the Mount Banking Corporation which used to have a large Non Resident Indian clientele.

In 1992 Stanchart, which had lost heavily in the multi-billion dollar securities scam, had projected itself as the innocent victim and alleged that brokers who swindled it had siphoned the money into the Mount Banking Corporation.

The Bank of England believed the story concocted by Stanchart and ordered the closure of MBC. After a seven-year litigation, a British judge concluded that there is not a shred of evidence of complicity in transferring money out of India.

In India, the hastily closed down Bank of Karad and Metropolitan Cooperative Bank were victims of similar allegations. Today Stanchart's claim that it lost Rs 1,239 crores is also beginning to wear thin and its cushy little deal with stockbroker Hiten Dalal is now public, but the damage has been done.

The question is are we in India prepared for the entry of sophisticated fraud, which will increasingly be the norm of the future? Do we have systems to deal with unscrupulous competition or the cheating of investors? The answer is No. We are neither prepared to deal with dubious companies nor have the mechanism for swift investigation. What's more we don't even have a culture, which imposes stringent, debilitating and deterrent punishment on wrong doers.

The Insurance Bill will be the first important piece of legislation cleared by this government. It will finally end government monopoly over the business. It is interesting to note that even prior to nationalisation in the fifties, instead of punishing the bad eggs in the business, the government chose to nationalise industry. The fact that insurance legislation, even in those days, provided for the punishment of such companies was ignored, as was the plea of stalwarts such as A D Shroff, the then chairman of New India Assurance Company, who argued that nationalisation would stunt the business.

Since the insurance monopolies in India are on the verge of being dismantled, India needs to ensure the presence of a powerful and independent regulatory regime. As of today, the non-statutory Insurance Regulatory Authority of India has been conferred with the powers of Controller of Insurance under the Insurance Act, 1938. When the IRA Bill becomes an Act, it is expected to be more powerful but this will serve the purpose only if the IRA hears complaints expeditiously and has the courage to hand out stringent punishment and hefty fines like those imposed on Prudential Insurance.

The mess that is telecom regulation does not bode well for the future of independent regulators. So far, the Telecom Regulatory Authority of India is a good example of how not to create independent regulators. Its powers are hazy; it does not address the concerns of small consumers; and almost every decision it has made has landed up in court for settlement. Neither the consumer nor the telecom companies are happy with the TRAI, and if that's not enough, the TRAI itself is creating further controversy over the foreign travel and per diem expenditure by its top brass.

Naturally the process of creating independent regulators for ports, aviation, roads and other infrastructure industries has not made headway. Amazingly enough, Indian business seems completely unaware of the danger of not having an effective competition policy or anti-trust legislation. It continues to be focussed on blocking the entry of foreign companies. It is barely beginning to wake up to the concept of good corporate governance and its positive implications in terms of a high market valuation.

The Confederation of India Industry, we learn, is working on anti-trust legislation, but so far, it remains a secret. CII President Rahul Bajaj says that the first phase of its efforts in this direction will be towards creating awareness about competition policy and the need for it. The second phase will involve drafting a suitable policy for the Indian market. As for the Indian consumer, the less said the better. In the absence of professional and well financed consumer groups in the country, they have not even managed to make a suitable representation of their interests to various regulators and the government.

The next millennium will also force Indian business to deal with competitive forces unleashed by India signing the World Trade Agreement. It could well be that the real Y2K bug for Indian industry would manifest itself in terms of its unpreparedness to deal with competition and liberalisation.

-- Sucheta Dalal